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This week Sam’s Club (Wal-Mart) and Costco both announced that they were going to limit the amount of rice that people can buy at one time. With prices going up world-wide by around 75%, these measures seem prudent. A statement from a Sam’s Club spokesperson describes their restrictions.

The store will limit customers to four 20-lb. bags of jasmine, basmati and long-grain white rice, the company said in a statement. Its restriction mainly will affect businesses that buy rice in bulk, but the company said "a typical Sam’s Club Business Member does not buy more than 80 pounds of rice in one visit."

From CNN - Skyrocketing Rice Prices has Sam’s Club Limiting sales

Sam’s Club and Costco are doing their part to pre-empt the rice shortage in the U.S.

Or ARE they?

We’re Overflowing with Rice

Doing a touch more homework, it appears that the domestic rice issue isn’t so cut-and-dried (no pun intended).

The global rice market remains critical to the viability of the U.S. rice industry. Despite steady expansion in domestic rice use, exports continue to account for 45 percent or more of total use of U.S. rice each year.

From the USDA web site - Rice: Market Outlook

So, while much of the rest of the world is suffering through a huge price increase on a staple food, the United States grows DOUBLE what it uses domestically, exporting the rest to other nations. That doesn’t sound like much of a scarcity of rice. To the U.S. and other major industrialized nations, it means a relatively minor increase in food costs, as rice makes up a smaller overall percentage of the daily diet than in ‘developing’ countries.

So why do the big box stores jump on the rationing bandwagon so soon and fast?

It’s the System, Stupid

Now is the time to talk about the business model on big warehouse stores like Costco and Sam’s Club. Everyone that shops at these stores has to be members, paying a yearly fee to be able to come in and shop. When you get this membership, you have access to the lower prices of goods available in bulk from these places.

The business model that is in play here? Sam’s Club and Costco make almost NO profit off of everyday sales!, They sell the products at almost break-even prices. They are able to get lower prices through this tactic, and through the massive amounts they buy. They can negotiate bargain rates because of these huge purchases, which they pass on to the consumer.

The part where they make their (huge) profits, is from the memberships they charge. The membership fees, ranging from $30-80/per person/per year, come up to a SUBSTANTIAL amount. And this amount is almost pure profit.

A Wrench in the Cogs

The problem with this business model is that neither store can afford to raise prices. Thus, if you are a frequent shopper at either of these stores, you’ll notice that the prices seldom if ever change. They’ll run out of the item on sale before they change the price on it.

With the price of rice going up, and the business model of no price increases in place, Sam’s Club and Costco are in a sticky situation. Normally they can weather price changes, by upping the price the next time they buy in bulk, or spreading the loss across other purchases.

As rice is a staple food, and they have consistent long-term contracts (again to get the LOWEST prices) the increase in price is hurting them, especially as there doesn’t seem to be a near-term solution in sight.

So, their only alternative to stem the losses, sell less of the product.

It may hurt small business owners a little, as they will have to supplement their purchases with outside, more expensive rice to meet their needs, but it keeps the big box stores in the black and, preserves the low prices for everyday shoppers.

It beats price increases.

Do you have thoughts on how the rising price of food is affecting your life? Leave a comment and let us know how.

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